Trading Peace in Egypt and Israel

This year marks the tenth anniversary of an Egyptian-Israeli economic partnership that has quietly pumped billions into Cairo’s vulnerable economy. The free-trade framework known as Qualifying Industrial Zones, or QIZs, is one of the few points of economic normalization to have grown out of Israel’s 1979 peace agreement with Egypt and subsequent deal with Jordan. Given the flagging Arab economies and regional instability, the success of QIZs has implications far beyond the bottom line.

Essentially, QIZs are industrial parks through which participating countries—specifically Egypt and Jordan—can export goods under the flag of the U.S.-Israeli free-trade agreement. Egypt is now home to 15 QIZs and Jordan to 13, which together account for some $1 billion in exports a year. QIZs differ from other free-trade zones in that they are not the purview of a single country. Rather, they are jointly operated by Israel and either Egypt or Jordan, with oversight from Washington. Moreover, their products all have a single destination: the United States.

QIZs are the brainchild of Omar Salah, a Jordanian businessman—who, like 70 percent of his countrymen, is of Palestinian descent—seeking to capitalize on the optimism that followed the 1993 Israeli-Palestinian Oslo Accords and the following year’s Israeli-Jordanian peace deal. He was particularly keen to find a way to take advantage of a free-trade agreement that the United States had signed with Israel eight years prior.

Rebuffed by Jordanian officials as “naive,” Salah traveled to Washington to lobby the State Department, White House, and U.S. trade representative, whose interest finally piqued that of Salah’s own government in Amman. The QIZ agreement was signed into law by U.S. President Bill Clinton in 1996, and stipulated that at least 35 percent of the product content of QIZ exports to the United States must come from Jordan, Israel, or the Palestinian territories, whereas the rest could come from anywhere in the world (but would be funneled through the QIZs). At least 11.7 percent of the material (later reduced to 8 percent) had to be Israeli. Everybody won: Jordan now had duty-free trade with the world’s largest consumer market and Israel had achieved the first economic agreement with any of its neighbors, one with labor costs 40–70 percent lower than its own. 

Inspired by that example, Egypt followed suit in late 2004 with its own QIZ deal with Washington, which went into force in early 2005. In the decade since, Cairo has tripled textile exports to the United States, and Egyptian QIZs now supply fabrics to American brands such as Gap and Levi Strauss. All told, the QIZs house nearly 700 companies, export nearly $1 billion in goods to the United States (according to State Department figures), and provide a livelihood for nearly 300,000 people. Roughly half of Egyptian exports to the U.S. now come from QIZs.

Egyptian cotton is famously high quality, and textiles are a pillar of the country’s export economy. Still, that economy remains hobbled by a soaring population, low foreign-exchange liquidity, rising inflation, and a growing terrorist menace that has curbed tourism. In response, Egypt has doubled down on the QIZ program. In February, Cairo announced plans to double its QIZ textile exports within three years—something it seems serious about doing—and in May it proclaimed that more industrial areas and product sectors were in the works.

As for Jordan, the kingdom has less than one-tenth Egypt’s population, and its economy is correspondingly smaller. Like its more sizable neighbor, however, the kingdom faces daunting economic challenges, including scarce natural resources, six percent inflation, and the burden of housing, feeding, and employing some 600,000 Syrian refugees.

For Jordan too, the QIZ has been a blessing. In the decade after the program’s founding in 1997, the kingdom’s exports to the United States spiked from $15 million to $1.2 billion. This success led to the Jordanian-U.S. free-trade agreement of 2000, Washington’s first with an Arab state. That agreement has partially overshadowed Jordan’s QIZ program, but it still rests largely on the infrastructure created by it. Today, Jordanian QIZs outfit brands from Walmart to Calvin Klein to Victoria’s Secret. They employ 43,000 people, most of them women.

To be sure, the QIZs achievement is not unqualified. Critics note, accurately, that a significant portion of the zones’ investment comes not from local investors but from other Arab states and Asia. Much of the revenue, they say, accrues to a few big firms. In Jordan, a majority of the QIZ workforce is foreign, and labor-rights groups have highlighted potential abuses.

The loudest criticism of all comes from the overwhelming majority of Egyptians and Jordanians who still oppose normalizing ties with Israel. For years after the Egyptian-Israeli QIZ agreement, for instance, the Egyptians balked at joining their neighbors in joint trade roadshows in the United States. Oddly enough, it was in 2013, during the short-lived presidency of the Muslim Brotherhood-affiliated Mohammed Morsi, that the cash-strapped Egyptians finally asked their Israeli counterparts to hit the road together. That joint marketing strategy has continued, and earlier this year, North America’s largest textile trade show held a gala dinner in Las Vegas to mark ten years of the Egyptian-Israeli QIZ. Bilateral cooperation now extends beyond the QIZs: Israel recently signed preliminary deals to sell natural gas to Jordan and Egypt.

These are small steps. Yet in the era of ISIS, civil war in Syria, and turmoil over the Iranian nuclear program, it is encouraging to witness some Middle Eastern entrepreneurs promoting a daring idea: that decades-long enmities can fade, and that doing business with old foes may even pay off.

Oren Kessler is the deputy director for research at Foundation for Defense of Democracies. Follow him on Twitter @OrenKessler